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Morning Coffee: Jane Fraser feels uncomfortable every day at Citi. Hedge fund manager escapes prison because he’s a dad

The problem with Citigroup is that in many ways its biggest strength is its biggest weakness.  As the company pointed out at its most recent investor day, it covers the whole world with its flagship Global Services division, providing crucial financial infrastructure for all sorts of companies and markets. 

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But one consequence of being that big and that vital is that people expect you to do things perfectly.  And that’s difficult; as a big profile article in the WSJ makes clear, Citi CEO Jane Fraser is on notice from the regulators that their tolerance for messy systems and operational failings is at its limits.  So she needs to move fast.

None of this is easy for Fraser, who has gone from saying "Get behind me or get off the train" to warning that Citi would be “saying goodbye to some very talented and hard-working colleagues,” to telling the WSJ. “I feel uncomfortable every single day.”

If you try to move fast, you often break things.  Every time Fraser simplifies the structure of Citi by closing down or selling a business, she makes enemies; bringing in senior bankers from outside also creates resentment among those who rightly or wrongly thought they deserved the jobs.  Apparently, there is a group of London-based Citi bankers who are in the habit of anonymously berating their CEO in the comments of online articles about the bank. (Which is to say – they are commenting anonymously.  If it’s become sufficiently obvious to appear in the Wall Street Journal, the likelihood is that people are also gossiping about who’s doing this within Citi and the identities aren’t likely to stay secret for long).

It's all oddly reminiscent of former cycling champion Chris Boardman’s description of how to ride a stage of the Tour de France.  Apparently, he used to regularly ask himself, “can I keep this pace up for the rest of the race?”.  If the answer was “no”, that was obviously bad.  But if the answer was “yes”, that was also bad – nobody wins a time trial by staying in their comfort zone.  So he always tried to get the answer “maybe”.  Maybe Fraser's lack of comfort with the restructuring programme is how it’s meant to be.

If so, that's a good thing because it's going to be uncomfortable for a while. – Although the big management delayering of “Project Bora Bora” is at an end, the overall program is only halfway through.  When she was at McKinsey in 1999, Jane Fraser wrote a book portraying Citi as a case study in “leveraging superior business-system productivity costs in different geographies”.  In order to get that statement to be even nearly true in the 2020s, there’s going to be quite a lot more organisational pain.

Elsewhere, it’s hard to play the victim if you are Morgan Stanley.  That’s one message from the judge in the trial of Neil Phillips, the hedge fund manager who dumped a massive trade into the South African rand FX market on Christmas evening, and foolishly sent a Bloomberg chat message saying that he was trying to push the rate through the trigger level for a barrier option he’d bought from Morgan Stanley.

Phillips was at risk of up to 10 years in prison, but was let off with a fine. The judge noted that both sides of the trade were “sophisticated participants in the unregulated foreign exchange spot market who knew the risks involved”. Interestingly, he also said that MS could have protected themselves from the loss by hedging; although the jury didn’t buy Phillips’ argument that “barrier chasing” was a standard market practice which everyone in the market understood would happen, it might have carried some weight at sentencing.

The judge also noted that Phillips has two children, over whom he has sole custody and that they would have been harmed by the long prison sentence that the prosecutors were asking for.  So it seems that this was regarded as a financial offence which deserved a financial penalty.  The judge imposed the maximum fine allowed under the law (a million dollars), but sentenced Neil to two years’ probation, plus the jail time he’d already served when he was arrested.

Is this good news for people like Bill Huang or Charlie Javice, who are also on their way to court in cases where it’s also the case that the people who lost money were big banks?  Not necessarily.  Although Phillips was something of an abrasive character, there really were people in the market who felt he had a hard time, and there was some genuine room for doubt about whether barrier chasing was really all that bad.  He’s had a lucky escape, but that doesn’t mean that courts love bankers these days.

Meanwhile …

They always say that the best way to sail a yacht is to make friends with someone much richer than you, and then persuade them to let you have a go on theirs. Jefferies consumer bankers must have been thrilled to find out that Rich Handler had taken Night Howl (the 164 foot Westport superyacht formerly known as Boardwalk) to Nantucket for their annual conference. (Bloomberg)

If you’re not lucky enough to have a conference in Nantucket, your next offsite might involve sitting down wondering what rhymes with “convertibles” as you try to write a country song about your company in Nashville. (WSJ)

Mizuho is “absolutely seeing a rebound” in US investment banking revenues, and hiring accordingly to beef up the franchise it acquired with Greenhill. (Japan Times)

Balyasny’s recruitment strategy is to get the best sell-side analysts and bankers, put them through a bootcamp in Python and AI, and then put them through a further course in “soft skills” and “how to talk to portfolio managers”.  Presumably the last bit is because they forgot how to schmooze while learning coding? (Business Insider)

Ken Griffin has managed to get an apology out of the tax man – the IRS have apologized for leaking his tax returns, along with those of Jeff Bezos and Elon Musk. (WSJ)

Santander has decided that investment bankers won’t be allowed to have WhatsApp on their phones (they had already banned its use, but some people apparently hadn’t deleted the software).  It’s not clear whether this ban applies to the rest of the bank, or what it means for the famous “Promontorio” group chat which Andrea Orcel was invited into, and then chucked out of. (Bloomberg)

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AUTHORDaniel Davies Insider Comment
  • Lw
    26 June 2024

    Agree, the biggest problem with Citi is its company culture poised from the top, CFO, CCO, COO - a law suit filed against the COO on hiding issues from regulators. There are lots of similar cases. Top management powers have the tradition of hiding issues and lay off people voicing out and trying to make a change. As long as those top powers not removed, no hope for the company. Very sad.

  • Co
    Cowboy Bob
    26 June 2024

    Citi is a horrible institution with an atrocious culture, with the most over paid CEO in banking by far. Working there was the most painful experience in my career. Fraser's primary attribute for getting the CEO gig was being a woman in the right place at the right time. They need to focus more on good management and solid banking and not their DEI program.

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